Worstall’s Malignant Lump
In an op-ed at the New York Times yesterday, Nick Hanauer and Robert Reich made the following observation:
In a cruel twist, the longer and harder we work for the same wage, the fewer jobs there are for others, the higher unemployment goes and the more we weaken our own bargaining power. That helps explain why over the last 30 years, corporate profits have doubled from about 6 percent of gross domestic product to about 12 percent, while wages have fallen by almost exactly the same amount.
According to Tim Worstall, Hanauer and Reich committed a lump-of-labor fallacy. Worstall objected specifically to their claim that raising the income cap for the overtime premium would force employers to either pay higher wages or hire more workers. Worstall’s objection is that the employer’s demand for labor will not remain the same if the cost of that labor goes up.
To be precise, Worstall’s assertion is one version of the fallacy claim complex. It happens to be the version refuted by Maurice Dobb in 1929. As Dobb pointed out, workers are concerned with how much compensation they receive in return for the amount of effort required of them and not simply in the aggregate amount of employment in the economy. Working longer hours for less pay is not a bonanza for the workers even if it does lead to more aggregate hours worked in the economy as a whole.
But again, Worstall’s fallacy claim is but one version of a complex of claims, some of which contradict each other. I addressed this perplexing proliferation of claims in my contribution to Working Time: International trends, theory and policy perspectives. Refute one of the bogus fallacy claims and a substitute will immediately pop-up to take its place!
It is not easy to unpack what is going on inside the fallacy claim because its persuasive strategy is based on a “house of mirrors” effect. Whether disingenuously or unwittingly, fallacy claimants commit yet another version of the fallacy they attribute to others. Their error, though, is embedded in the perfect competition, perfect information, full employment, ceteris paribus abstractions of the standard equilibrium model of supply and demand. The name given to this set of abstractions by those who mistake them for a description of reality is “economics.” When “economists” commit this vulgar error it is regarded by Worstall & Co. as an infallible maxim.
Now, it is conceivable that some of those accused of committing the lump-of-labor fallacy may indeed assume the proverbial “fixed amount of work to be done” or whatever. There can be bad arguments for a good cause. But, as A.C. Pigou pointed out in his refutation of the ubiquitous fallacy claim, “If it were a good ground for rejecting an opinion that many persons entertain it for bad reasons, there would, alas, be few current beliefs left standing!”
“While that’s a trivial example it illustrates the great truth that the lump of labour fallacy misses: that the amount of work to be done depends upon the price of the labour doing the work. Change the price of the labour and you change the amount of work.” Worstall
What an asinine conclusion. Worstall has left out the more important factor in the need for labor. An employer is a business person with a need to get a product to a customer. Does that business person start out the process by wondering just how many people can he/she employ for the goodness of humanity? I think not. Employers hire labor in order to participate in the process of connecting a product to customers. That’s how the business earns income and, hopefully, a profit. The “lump” of labor is specific to an employer’s need to complete that process. There is no fallacy in an employer’s need for labor. The fallacy is that an employer bases its need for labor on some altruistic desire to employ others. Absurd on its face. A task requires a certain number of participants to be completed in an effective manner. Employers have needs for labor to complete tasks. The cost of that labor is borne by those who seek to purchase the goods offered in the process. That cost has a degree of elasticity, but it can never be the cause of reducing the amount of labor required for completion of the task.
Great post.
Most of the people who make such claims have never set foot in a factory, rearranged it, scheduled multiple production lines, or managed a crew of workers. It is theory to them and a poor rendition of what takes place on the shop floor with the labor involved.
To wit, the last thing one would want is a group of tired machinists chucking up chunks of steel improperly. Creates a lot of damage and potential injury when one spins loose.
“The cost of that labor is borne by those who seek to purchase the goods offered in the process. That cost has a degree of elasticity, but it can never be the cause of reducing the amount of labor required for completion of the task.”
I disagree. If the cost of labor goes up, then it is more cost effective to purchase capital equipment to do some of the manufacturing tasks.
Let’s say I have a simple assembly process that requires four steps. I can purchase four inexpensive single-stage presses and have one person manning each, and scale up in groups of four as the business expands. If the price of labor goes up, I can get the same productivity from a four-position progressive press that does all four operations (one on each of the four pieces being worked) in one stroke. If labor costs go up still more, I can buy an electrically powered press and the worker only needs to dump in the constituent parts the machine needs to do its job. That allows me to scale such that I need one of those for every four of the manual progressive presses I had before.
As labor costs go up, machinery takes over more and more. Productivity (output per man-hour) goes up, and fewer people are employed. That is the case in our manufacturing sector as a whole. We produce more stuff, but with fewer and fewer PEOPLE doing the work, and more and more MACHINES doing the work.
While Reich & Hanauer make a valid and correct observation, the essence and fundamental question is why would and why do people work harder or more hours for less pay?
A couple reasons I can think of based on empirical real experiences:
1. To curry favor with supervisors for future promotions, favoritism, preferential treatment, reduce probability of being laid off in downturns.
2. To prevent supervisors from giving them the “shit” work even punishing them for “failure to perform to expectations”.
3. In modern “ranking” systems, to avoid being ranked in the lower 25% or lower 10% which puts them in real jeopardy of being replaced or receiving no raise or a raise below the past rate of inflation.
All of these reasons boil down to exploiting “individualism” as a means of getting more for less. The success of these exploitive methods depends on there being more labor available (at the requisite skill levels) than demand for it.
The bubonic plague in Europe in the 13th/14th century is a case in point, as is the much later corollary of ability of “combinations” (unions of labor) to restrict the use of these “individualism” exploitive methods.
These methods also all depend on somebody having the power to exploit which power is obtained and maintained by the “divide & conquer” strategy.
I keep wondering why this has been able to remain so successful in societies for so long (historically since the ancient Greeks, Romans, Egyptian societies were composed of owners and their slave labor forces).
I’ve tentatively had to conclude that it’s because those who have once established their power have retained the ability to maintain it by virtue of the fact that they have established it in the first place — in modern “democratic” societies this is manifest through the power to control gov’ts. In short it’s a particular paradigm that suits and benefits those in power…. the rest of us have little choice but to “go with the flow”, or fear of change is a greater incentive to not upset the apple cart. If voting power made any real difference the ability to exploit would have long since vanished.
Warren,
“We produce more stuff, but with fewer and fewer PEOPLE doing the work, and more and more MACHINES doing the work.”
In this case you are both right and wrong. You are right that employers will replace labor with machines if the machines can do the work more cheaply. But you are wrong if you think this argument rescues Worstall’s fallacy claim because, according to the lump-of-labor enthymeme — look it up if you don’t know what that is — “technology creates more jobs than it destroys.”
ditto
“If the cost of labor goes up, then it is more cost effective to purchase capital equipment to do some of the manufacturing tasks.”
And if such equipment is available for the task at hand then it would have been put in place from the start of the business. That is unless the amount of goods to be produced did not warrant the cost of purchasing machines to do the work. Are we discussing how business people decide to open an operation? Or are we simply assigning our individual ideologies to explain how the world works? If good business practice on an individual basis dictates machine process vs. hand labor than that is what will be the case.
The issue isn’t man vs machines. The issue is the cost of labor when labor is required to complete the tasks. Some labor is required to operate the machines and possibly that labor is more costly than the labor that was replaced by the machines. Often machines are used to do tasks that are too difficult or precise than can be done by manual labor. That is more likely the case in the man vs. machine issue. Labor cost is not the determining factor.
“[If] such equipment is available for the task at hand then it would have been put in place from the start of the business.”
Not so. If labor is cheap, and machines expensive, you purchase fewer machines and more labor.
“Some labor is required to operate the machines and possibly that labor is more costly than the labor that was replaced by the machines.”
And when the price of unskilled labor is artificially inflated, compressing those wage differences, the balance tilts toward buying machines and fewer, more expensive (but not as much more as previously) employees to maintain the machines. Just look at grocery stores, hardware stores, and self-serve gas stations. And fast food will go the same way.
First thought, there is a limited amount of labor that labor is capable of performing – starting out with all day exhaustion in more primitive industrial or agricultural economies (but not in primitive hunter-gather groups) and proceeding to how much labor is willing to work for X amount of remuneration when bare survival is no longer at stake.
In this light we could all pay each other more if we all worked more hours individually or if more individuals worked hours (we’ll get to that). Culture can be the sole arbiter of how much we are willing to work for X – meaning the amount is voluntarily set by ourselves. This is more likely in a (truly) free labor market (France) where labor is capable of withholding its input to bargain (collectively).
Less likely in a (truly) unfree labor market like the US economy where collective bargaining power is a thing of the past. Here labor will work more hours for less – sort of cutting the cultural limit in the middle.
Free or unfree, labor’s willingness to put in hours for X is set mostly by culture – which pretty much means whether labor is from a rich or poor country. This latter can lead to a labor supply anomaly when rich and pour country labor is mixed together in the same economy.
American labor force is 150 million. We have 40 million immigrants – let’s say half work. 20 million willing to work-for-less have a deep impact on the pay prospects of the 75 million in the bottom half of labor income – make that closer to 55 million native born.
More especially in an unfree labor market.
In Chicago anyway, low wage jobs belong to immigrants. Don’t just think McDonald’s, think American taxi drivers – that’s me. We are not willing to put in 60 grueling hours for $400-500 a week (my best – my guess at best) for what used to pay $800-900. We’ve dropped out.
More systemically, 100,000 out of (my guesstimate) 200,000 Chicago gang age, minority males are in street gangs. If supermarkets paid $800 a week instead of $400, I’m pretty sure they’d all be stacking shelves instead of shooting it up over territory.
Anyway, there is a lump of labor’s ability – and willingness – to work. FWIW.
Denis:
Sorry, I missed this.
Set aside the total cost of labor in a component rolled up is less than 10% today. It is still possible for the cost of manufacture to still rise.
There is a diminished return the longer one works. If a component takes 5 minutes to complete during a normal 8 hour work period, it is possible it would take six or 7 minutes to complete past a normal 8 hour day. In the case of installing automotive door wire harnesses. a slow down of the line to accommodate tired workers results in less output and a costlier assembly. Minutes slower or down account for major costs.
Even at time and a half or double time on holidays, labor output decreases when labor is tired. The result is obvious.
“Anyway, there is a lump of labor’s ability – and willingness – to work.”
Indeed, Denis. One thing that has always puzzled me about the l-o-l taunt is that it sometimes claims demand is “unlimited” and at other times claims that demand is hair-trigger sensitive to price changes.
There IS a fixed lump of potential labor supply, which is the number of potential workers times the number of hours each of them can work before exhaustion makes them unproductive.
Let’s say there is a population of 100 potential workers and 50 hours a week is the absolute maximum each can work without impairing their capacity to come back and work as productively the next week. The lump of labor supply is thus 5000 hours per week. At that maximum, there can be no demand for labor greater than 5000 hours per week because a higher price can not call forth more labor supply — just a higher price for that given supply. Inflation!
Curiously, lump-of-labor scolds are often the same folks who sound alarms about the threat of inflation from deficit spending. What are they afraid of? Isn’t there an “unlimited amount of work to be done”? Or does that assertion only apply when it supports their arguments and not when it undermines them?
“One thing that has always puzzled me about the l-o-l taunt is that it sometimes claims demand is “unlimited” and at other times claims that demand is hair-trigger sensitive to price changes.”
Well it doesn’t puzzle me. You see the same thing as it relates to any kind of tax on business. Why the cost just gets passed through to the customer. Total price elasticity. On the other hand any increase in compensation per employee has to be absorbed within total labor cost. Because total price inelasticity. Well it is one or the other.
The reality of course is that prices are neither elastic or inelastic but instead sticky to both the upside and downside. And what gets squeezed is not necessarily either price or total employment but instead profitability.
That is arguments against minimum wage that rest on “job loss” are not totally irrational. The problem is that the job that might be lost is that of the business owner for a small business. Or some tiny fraction of equity appreciation for the shareholder of the large business. And the powers that be insist that we should shed the same amount of tears over Bob at “Bob’s Burger” and the CEO and Directors of Pepsi-Co or whoever owns Taco Bell and KFC these days.
Let’s make a deal. Start paying me $15 an hour and I will pay an extra 50 cents for my weekly burger at Bobs. And fuck McDonalds.
Here you go, a place for you to eat in Detroit where the hamburger flippers make $15/hour starting in 2013. Moo Cluck Moo. Even at $15.00/hour, the cost of the unburdened Labor is still far less than the Overhead and Material cost. To fund Pappa John’s healthcare insurance for employees, it would cost you 10 cents more per medium pizza.
There are other factors which impact the costs of the product well beyond Labor costs. Elasticity and inelasticity are too often used to describe something in which the author knows little about in the micro sense.
“Even at $15.00/hour, the cost of the unburdened Labor is still far less than the Overhead and Material cost.”
Labor also produces the materials and overhead. If the price of labor increases, so does the price of overhead and materials.
Labor Share is about 60% of GDP. The median hourly wage is $16.71. Raising the Minimum Wage to $15 per hour would immediately increase the wages of about 40% of hourly workers. Those higher up the ladder will demand similar increases.
Warren:
This isn’t going to be a discussion between you and I. Don’t even try with me as I have tolerated your BS for a while now and I have a short fuse.